Statement of Financial Accounting Standards (SFAS) No. 2 (FASB, 1974, para. 12) mandates that all research and development (R&D) spending be immediately expensed. Lev and Sougiannis (1996, p. 134) indicate that off-balance sheet R&D assets (as a proxy for the future payoffs from R&D spending) provide investors with reliable and relevant information. However, usefulness is a necessary but not a sufficient condition for financial reporting regulation (Lev, 1988, p. 2). Rather, regulators have a mandate to maintain public confidence in the securities markets as a level playing field by mitigating information asymmetry or ex ante inequity (Levitt, 1998, p. 79). In this study, we document the information asymmetry effects associated with off-balance sheet (unrecorded) R&D assets using a market microstructure methodology. Collectively, the evidence suggests that a potential harm (lower market liquidity) is associated with the current accounting treatment of R&D spending.